Fannie Mae Expands Green Lending, Housing Innovation Platforms

Jeffery Hayward, executive vice president & head of Fannie Mae’s multifamily mortgage business, sat down with MHN at MBA's CREF/Multifamily Housing Convention & Expo in San Diego to provide an industry-wide outlook and discuss the GSE’s new initiatives for 2018.

Two weeks ago, the Mortgage Bankers Association held its annual CREF/Multifamily Housing Convention & Expo in San Diego. There, Jeffery Hayward—who heads up Fannie Mae’s multifamily mortgage business—spoke to Multi-Housing News. The following conversation details the GSE’s recent and upcoming initiatives, as well as impactful trends and important milestones in 2018.

What’s new at Fannie Mae?

Hayward: We were already on the trajectory to go green, and (Fannie Mae’s Green Financing business) exploded last year, from $3 billion to $27 billion. I think the reason is that owners are seeing that the savings are really there. Here’s the number I focus on: $127 per year in energy savings, which is about $10 less each month for tenants. Now, I expect our green lending program to be a mainstay of what we do.

Fannie Mae is also celebrating three important milestones this year: 80-50-30. The first one is Fannie Mae’s 80th anniversary. It’s been 50 years since the signing of the Fair Housing Act. This year also marks the 30th anniversary of our Delegated Underwriting and Servicing (DUS) lenders program, which is the longest running risk-sharing model in American business.

Last year, we introduced Healthy Housing Rewards, and it has two basic tenets. First, if you have a building that is designed and built for improving the health of your residents—say, with better air quality or more space for movement—we will give you a discounted price. The second part relates to resident services: If you offer after-school programs, tax preparation (assistance) or transportation for tenants to see their doctors, we will give you a discounted price. I believe that could be the next area for explosive growth, where we get owners of affordable apartments to start implementing (these practices) in their buildings.

We’re not just focused on financing buildings for the owner’s sake. We’re trying to reach through and find out how (these changes) impact the tenant and how can we ensure that their living circumstances get better.

This year, we went back into the low-income housing tax credit (LIHTC) business and just announced our first fund of $100 million (Raymond James Affordable Housing Fund 11 LLC). We’re going to start in hurricane-affected areas. We picked (the region) because we wanted to go to the places that needed us the most. If you watched what happened in Houston, you couldn’t help but feel that you had to do something about it. Rather than sit and offer commentary, we knew we could try to help. Our fund is aimed at Houston and underserved markets.

Our (management) partner is Raymond James (Tax Credit Funds, Inc.), and together, we’re going to build units that are disaster resistant. By that I mean, we’ll be putting mechanicals on the roof instead of the basement in case of flooding. Another feature we’ll include is backup generators. So, if you’re in a flood zone, you’ll at least be able to have power. We’re thinking about how people can survive a disaster, so that we never have to go through (a situation like Hurricane Harvey’s aftermath) again.

We’ve been authorized to do $500 million in LIHTC, and we’ve just gotten started. So, there will be more initiatives like these.

What’s your 2018 outlook?

Hayward: We expect to do about as much business as in 2017 (more than $67 billion) because we think the size of the market is approximately the same as it was last year. I think the year may start off a bit slower, due to tax reform and because interest rates are going up—factors that might give some people pause.

The amount of equity that’s available to invest in the market has increased, and that’s not by accident. The demographics are such that the number of people who want to rent apartments is so large, while the availability of apartments is very low. Equity capital chases opportunity, and since there aren’t enough apartments, rents are increasing, along with investment. I don’t think that dynamic is going to change.

Additionally, lenders are being responsible and prudent. As long as we have an environment with strong credit standards, one in which people are taking care to originate (sensible) loans, then I don’t expect to see signs yet of deteriorating underwriting standards. But, of course, that can change if rates go up 300 basis points, but even if rates continue to increase gradually, I don’t expect this to be a problem at the moment.

Amid a lengthy economic recovery, what risks does the multifamily industry face in 2018?

Hayward: (Fannie Mae’s) economists are not predicting a recession yet. If economic fundamentals are strong, then you won’t have a recession until there’s some type of imbalance, which is not forecasted for the near future. But there are certain trends to be mindful of, such as the effect of the deficit and recent government spending.

The question concerning the Federal Reserve (unwinding its balance sheet) is whether there is enough demand for those investments. We’ve enjoyed large investor pools and tight spreads because the demand for (Fannie Mae’s) paper is much higher than the supply. At the moment, we’re not seeing any resistance to buying multifamily-backed securities due to the Fed letting its mortgage-backed securities run off.

There is something I find particularly troubling for people of modest means and working families: the housing supply shortage, which is a long-term, societal problem. There are cities in this country where you can make $100,000 per year and be homeless. That’s a social crisis, but one we can solve if we work together. For example, part of why more apartments cannot be built is because local zoning regulations and restrictions on density won’t allow it. Until these local governments figure out how to tackle these problems, honorable, hard-working people will keep struggling to find housing for no reason other than antiquated rules.

Which markets are feeling the greatest impacts of multifamily supply growth?

Hayward: The most supply-impacted areas all have strong job markets, so the units will get absorbed. On the other hand, there are other markets that are starved for affordable housing, such as Berkeley, Calif., Oakland, Calif., or San Francisco, where the oversupply is among high-end apartment units. Generally speaking, the oversupply issue pertains to high-end new construction.

I’ve had the privilege of visiting some excellent examples of solutions to the oversupply issue. Centennial Place in Atlanta is a workforce housing development for mixed-income residents, with its own charter school, a grocery store and YMCA. It really is a community within a dense urban area. I’m encouraged when I see that strategy being implemented. This is what we ought to be doing in cities like Los Angeles.

What else is Fannie Mae doing in response to the increasingly challenging issue of housing affordability?

Hayward: To address the country’s affordable housing shortage, Fannie Mae announced its Sustainable Communities Innovation Challenge last December and closed the first phase of submissions in February. As part of a two-year investment, we put up $10 million to support affordable housing solutions and, working with an expert panel, will subsequently partner with selected applications. Focusing on economic opportunity and housing, we’ve been seeking great ideas for sustainable communities that expand employment, health, wellness and education opportunities for residents. We think we should be part of the solution, but admit that we don’t have all the answers, so we want to partner with people who might.

So far we’ve received submissions from non-profits, for-profit companies, individuals—a potpourri of applicants. There’s been a great deal of excitement. It’s important that we bring in people from outside of the housing industry to infuse our group with new ideas and fresh perspectives.